Building tailored M&A strategies becomes attractive

Though succession planning remains popular, tailored merger and acquisition strategies are gaining steam at small and midsize businesses as an alternative. They also bring other benefits, from cash flow for retirement to obtaining a company with a new product that enables instant expansion into a new market.

"It's the nature of our population. Baby boomers are getting older and looking to sell. If business owners don't have kids or a younger generation to pass along to, then an M&A plan is a viable alternative," says Michael Smith, of counsel at Chamberlain D'Amanda Oppenheimer & Greenfield LLP, who has seen merger and acquisition plans become an attractive option for businesses.

Smith is a legal resource for his clients, primarily private companies in trucking, insurance and furniture. Developing M&A plans for them, he says, is largely a matter of timing and personal goals.

"It depends on the client," Smith says. "Several of my clients plan to sell from day one. They build the business to a good size, sell it, sign a non-compete and work until they can do it all again. Others have a business and never plan to sell until they reach retirement age and realize they want to retire and need liquidity."

Preparing an M&A plan is also dependent on each client, he says, pointing to one business owner who required quite a bit of back-office work to get documentation in order.

"It was almost like a cleanup approach," Smith says. "The company had been so focused on the core business that the basic infrastructure was crumbling. There were verbal agreements we needed to get documented. Paperwork has to be in order before any sale can move forward."

There are many types of acquisition strategies, and Thomas Willett, a partner in the corporate group at Harris Beach PLLC, says he is seeing many more used in exit plans among his small-business clients.

"Every business owner has to have some sort of exit strategy," Willett says. "Obviously in a family business it would seem natural to pass on to the next generation, but that is never a guarantee. Are they ready for the transition, or even capable?"

In these cases, Willett says, mergers and acquisitions are becoming more common when initial public offerings are not an option for small businesses that do not generate enough revenue. He sees three main strategies among his clients: acquisition by a business within the same industry; acquisition by a financial interest not in the same industry but looking to invest; and transfer of ownership to a management team of company employees.

"Any of these is a way to get liquidity if a business owner cannot pass the company on to another generation," Willett says.

No matter what type of business, the question is not whether to have an M&A strategy but which one is best.

"We're seeing this as a universal trend in all types of industries," Willett says. "There has been lots of consolidation, with larger public companies outside the area acquiring smaller companies here."

The Bonadio Group has a specialized six-step approach in working with business clients on merger and acquisition plans. Jeffrey Lewis, a partner at Bonadio, says the middle market, which he defines as businesses with annual revenue of $5 million to $500 million, is underserved in developing such strategies.

"The first step is the assessment phase," Lewis says. "That's where we determine the goals of the client. Is he truly ready to sell? What is the potential value of his business, and what does he hope to get out of it?"

In this phase, Lewis says, he begins to build the relationship with the client.

"It boggles my mind that other firms skip this step and go right to phase two, the preparation-to-sell phase," Lewis says. "I might find that the client is hoping to get $10 million out of his business and we find it will only sell for $5 million. So we recommend ways to him to help it grow, to help him get what he needs before he sells it."

Once Lewis works through the first and second steps with his clients, he continues with the other four: marketing, deal-making, due diligence and closing. The process is meticulous, and the client will be certain of the decision once the deal is done, Lewis says.

The six-step process is designed to uncover every possible question throughout the journey, but the most critical component is step one. Once the first step of assessment is complete, Lewis says, he can create "the book."

"This is a 40- to 60-page document developed internally. We do our due diligence to guess what a buyer might ask, so we have the answer first," Lewis says. "Ninety percent of a buyer's questions will be answered in this excellent resource."

Developing the book helps Lewis see the whole picture so he can help his clients develop the best M&A strategy, he says. With a strategy chosen, the next consideration is timing.

"Three stars need to align to maximize value," he says. "The business needs to be performing well, preferably at peak. The market needs to be favorable for M&A transactions so financing is obtainable, and the third thing is the owner needs to be ready to sell."

Often a business owner feels compelled to make a move upon reaching a certain age or stage, though he or she does not have a succession plan. The owner might panic and feel an urgent need to sell the business before being ready personally, Lewis notes.

Even once clients are ready to sell, many will need psychological preparation to step away from the business, says Thomas Englert, CEO of EFP Rotenberg LLP.

"Sometimes a whole mind switch has to come into play," he says. "That's where we can be effective in working with clients.

"We have to remind them that sometimes we have to take emotion off the table. We have to eliminate the blind spots. That's not always easy to do when a business owner is looking to sell to a competitor."

Longtime owners can find it difficult to walk away from a company they have spent their lives building. There is the fear of loss of control, especially when selling to an industry rival.

"They have a lot invested in it. They often want it operated the same way, even though they are leaving," Englert says. "We try to coach them to have a mind switch from one of a competitive mind to one that is more collaborative."

This is helpful not only during the sale but when the buyer wants the seller to stay involved for a while to provide firsthand knowledge of the company.

"It sometimes comes down to what I call the 'Do you want control, or do you want cash flow?' conversation," Englert says. "Because when you reach retirement, you can't have both."

His firm has seen mergers and acquisitions as a solid exit strategy for its clients. Englert says it is not a new trend but one that has become more specialized with the deals being highly tailored to the needs of individual clients, whether to provide cash flow for retirement or to acquire a business that will expand market share.

"It's a strategy to help businesses build a menu of options as well," Englert says. "Many small businesses have a niche, and that can be very attractive to larger companies looking to acquire new capabilities."

However companies choose to use M&A strategies, the opportunities are opening up in new ways because of a changing market, observes Kevin Halpin, managing director of DeltaPoint Capital Management LLC, a private equity fund.

"We're seeing a lot of M&A transactions, and we're seeing more opportunities for companies to invest," he says.

Business owners now decide to sell segments of the company and do partial transactions with competitors.

"Sellers have to consider their options," Halpin says. "Do they want to have a role when they sell or reinvest in a new venture? Sometimes that could depend on the new owner.

"Business relationships need to be addressed from the direct investment perspective. Often the seller will have to stay involved for some time because he has the technical knowledge."

However the deals are arranged, Halpin notes, there will be expectations to manage on both sides. But with the right plan, he and others agree, mergers and acquisitions often benefit both parties.